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Yellen for a New US Federal Reserve Chair - Economics Weekly

Yellen for a New US Federal Reserve Chair

Global Economics Weekly Brief

Janet Yellen has been nominated as the next Chair of the US Federal Reserve. If confirmed, she will be the first female Chair in US history. Yellen is widely credited with being the architect of the Fed’s forward guidance policy, so her succession will likely mean continuity in US monetary policy.

Meanwhile the Government shutdown and the debt ceiling argument in the US is taking its toll on consumer confidence. Talks continue and most people expect a deal to be done before the deadline. But time is running out to avoid a default. The US Government need to act with responsibilities as at present the US look very immature globally!

Fed minutes show QE is here to stay. The September decision not to slow quantitative easing looked like a close-run affair. The minutes of the Fed's meeting show that most members thought it would be appropriate to start slowing asset purchases before the end of 2013. The last two weeks will have changed that expectation dramatically. The Government shutdown and the battle over the debt ceiling is draining confidence from the US economy, and from its monetary policy-makers. Even if the fiscal situation gets resolved soon, the Fed will want to wait and see what damage has been done. They'll be in no hurry to slow QE down and it will probably be next year before we see taper talk return. The US debt mountain is $17 trillion and rapidly increasing daily!

US confidence takes a hit. The University of Michigan's consumer confidence index for early October sank to a nine month low. This was mainly a result of events in Washington. But before we get too carried away with things, we should recall that at the time of the last debt ceiling stand-off in 2011, the index sank to an all time low and consumption expenditure slowed only very marginally. Still, this is not the start to October that we wanted. The US is dragging down global recovery! Are the Americans so naive!

UK growth forecast improved. In its most recent World Economic Outlook, the International Monetary Fund (IMF) revised up its UK growth forecasts by more than for any other advanced economy. Growth is now expected to be 1.4% this year and 1.9% next year making the UK the third strongest economy in the G7 during 2014 behind the US and Canada. That didn’t mean a totally clean bill of health however. The IMF’s key proposal for the UK remains that "bank balance sheets should be repaired expeditiously". Excellent news for the UK!

UK housing market accelerating. September's RICS survey of estate agents confirmed what everybody already knew - that the UK housing market is moving up a gear. Sentiment about prices among estate agents is the highest it's been for a decade. Incredibly, agents' expectations about sales over the next three months are a record high - a series that began in 1998. Once you've stopped shaking your head in astonishment, it's important to note that this doesn't mean agents expect the highest number of sales in recorded history. After all, transactions are still 40% below their peak. Rather, they expect higher sales growth compared to the recent past. It measures acceleration, not speed. The UK government `Help to Buy` scheme for houses could be a boom to burst scheme in the making!

Surprise fall in UK manufacturing. Following two consecutive monthly rises in output and continuing positive survey data, the manufacturing sector surprised in August with a 1.2%m/m fall. Though seven of the 13 subsectors grew, it was not enough to offset large declines in pharmaceutical, electronic and optical products and food and drinks industries. The fall in manufacturing output also contributed to a decline in overall UK industrial production (-1.1%m/m). Industrial production is still up for the three months to August, but this latest fall provides a bit of a reality check on the health of the UK recovery. The UK manufacturing sector is still not in recovery!

UK trade: good news, bad news. On the positive side, there was a slight improvement to the UK's trade deficit in August: -£3.3bn against -£3.4bn in July. This was helped by a 1.1%m/m rise in exports and a 0.1%m/m fall in imports. In addition, exports to non-EU countries rose while those destined to the EU fell. But while Augusts' data might look okay on the surface, the efforts of the UK to boost growth and rebalance via trade have met with little success. For the three months to August, exports were 1.2% down on the three preceding months, while imports rose to their highest level on record. More exports needed rapidly with far less imports to see a recovery in the UK!

OBR evaluates its forecasts. Too confident on the economy, not confident enough on the public finances. This was the main conclusion of the Office for Budget Responsibility's recent evaluation of its Budget 2012 predictions. The OBR attributed its errors on the public finances to significantly less departmental spending. On the economy, it was businesses that invested less than it expected, whilst households were broadly on track. More domestic credit debt on the rise and this is very alarming for the future recovery of the UK! Plus, the UK need more exports and far less imports and a rapid increase in home grown manufacturing!

No change from Paris again. The European Central Bank (ECB) left rates unchanged at 0.5% at its October meeting. The Governing Council, which met in Paris in one of the two away games played by the ECB each year, discussed a rate cut. But it decided against it, comforted by continuing signs of improvement in economic activity across the monetary block. Nonetheless, President Draghi reiterated that the recovery will be only gradual, and will remain fragile in the quarters to come. The ECB stands ready to provide further support as needed. Rapid rises in unemployment in many Euro country members is a major issue/problem!

Can Japan keep rolling? Confidence among Japan's large manufacturers and small service sector firms is at its highest since the financial crisis. In keeping with this optimism, Japan's government has decided to go ahead with its plan to raise the rate of VAT next year. Abenomics has also begun to yield a positive rate of inflation, due to a weaker currency raising the cost of imported energy. For Japan to properly escape its deflationary problem and ignite domestic demand, wages need to start rising. If they do not, the recent uplift in Japan will likely prove to be simply a temporary upswing. Watch Japan very closely!

World Economic Outlook (WEO)
Coping with High Debt and Sluggish Growth - http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf
The World Economic Outlook (WEO) assesses the prospects for the global recovery in light of such risks as the ongoing euro area crisis and the "fiscal cliff" facing U.S. policymakers. Reducing the risks to the medium-term outlook implies reducing public debt in the major advanced economies, and Chapter 3 explores 100 years of history of dealing with public debt overhangs. In emerging market and developing economies, activity has been slowed by policy tightening in response to capacity constraints, weaker demand from advanced economies, and country-specific factors, but policy improvements have raised these economies' resilience to shocks, an issue explored in depth in Chapter 4.

Plus, the `Global Risks 2013 Report - Risk Cases and Resilience` - click on the left
Global Economic Outlook for 2013 revealed - United Nations ...

* `10-Step Double-Dip Recession Survival Guide` - click on the connection below for comprehensive information.

Global Economic Crisis

Colin Thompson
DDL: + 44 (0) 121 244 0306

Mobile: 07831 588310

Main T: + 44 (0) 121 244 1802

email: colin@cavendish-mr.org.uk

Skype: colin.thompson384



Yellen for a New US Federal Reserve Chair

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